Insurance Broker Marsh & McLennan Announces Reform Plan in Response to Spitzer Lawsuit; Move Could Have Industrywide Implications

Property-casualty insurance broker Marsh & McLennan on Tuesday announced a broad reform plan that would end the practice of "contingent commissions" and could serve as a "template" for changes in the insurance industry, the Los Angeles Times reports. Marsh announced the reform plan, which will take effect on Jan. 1, to address allegations in a civil lawsuit filed by New York Attorney General Eliot Spitzer (D). The lawsuit alleges that Marsh did not award contracts through competitive bidding as stated and fixed prices with insurers in some cases (Mulligan, Los Angeles Times, 10/27). Spitzer filed the lawsuit earlier this month in state court after he subpoenaed insurance brokers and carriers to examine a practice in which insurers reward brokers with contingent commissions when they reach volume or profitability targets on business the brokers provide for insurers. According to some critics, the practice provides insurance brokers with financial incentive to place clients with insurers that pay the largest commissions. Spitzer said that such anti-competitive practices, some of which are illegal, have contributed to insurance rate increases for businesses and individuals. Spitzer said that his fraud investigation would target "virtually every line of insurance." Health insurers Aetna and Cigna, as well as UnumProvident, the largest U.S. disability insurer, have received subpoenas from Spitzer (Kaiser Daily Health Policy Report, 10/21). Metlife also has received a subpoena from Spitzer (Dow Jones/Indianapolis Star, 10/27).

Reform Plan
Under the reform plan, which Spitzer has endorsed, Marsh would ban acceptance of contingent commissions; disclose to clients all fees and commissions paid to brokers; require insurers to reveal fees and commissions on all policy statements; require "consistent commission rates for competing quotes"; record all employee phone calls and e-mails to establish an "audit trail" for insurance regulators and investigators; and establish a compliance unit that would monitor insurance-brokerage operations worldwide to enforce reforms (Los Angeles Times, 10/27). Marsh this week also announced plans to replace company Chair and CEO Jeffrey Greenberg after Spitzer said that he would not negotiate with current management. Marsh has not named a new chair, but Michael Cherkasky, an attorney and prosecutor who previously headed Marsh Kroll, the company's consulting business, has replaced Greenberg as CEO (AP/Long Island Newsday, 10/26). In a telephone interview, Cherkasky said that Marsh hopes the reform plan will satisfy the concerns of Spitzer and other insurance regulators nationwide (Los Angeles Times, 10/27).

Other Actions
Marsh also fired one employee and suspended four others in connection with the allegations made by Spitzer (Valdmanis, USA Today, 10/27). According to the Wall Street Journal, the reform plan "helped avert criminal charges against the company" by Spitzer. Marsh also has "aggressively" sought settlement negotiations that "likely will result in a large fine and could codify business changes they are putting into place," the Journal reports (Francis/Zuckerman, Wall Street Journal, 10/26). Cherkasky "refused to acknowledge that Marsh customers were overcharged or otherwise harmed by contingent commissions," according to the Times. Marsh hopes to complete an internal investigation of the allegations made by Spitzer within 30 days (Los Angeles Times, 10/27).

Nationwide Impact
According to USA Today, insurance brokers nationwide "are expected to follow" Marsh in "vowing to accept money only from clients and not insurance companies, despite the significant hit to profitability" caused by the elimination of contingent commissions (Valdmanis, USA Today, 10/27). In a statement on Tuesday, Fitch Ratings said that because Marsh is the largest U.S. insurance broker, the actions of the company "will force other brokers that have not already renounced contingent commissions to follow suit." Fitch added that the "change could have a significant adverse effect on insurance broker revenue growth and operating profitability going forward" (Los Angeles Times, 10/27). As a result, insurance brokers could raise fees charged to clients to find policies, according to some analysts (Valdmanis, USA Today, 10/27).

Other Investigations
Meanwhile, investigations into insurance brokers and carriers "are being opened across the United States," the Dallas Morning News reports (Augstums, Dallas Morning News, 10/26). California, Connecticut, Delaware, Florida, Illinois, Minnesota, New Jersey, Pennsylvania and other states have begun investigations, according to the Philadelphia Inquirer. On Tuesday, Pennsylvania Insurance Commissioner Diane Koken (R), president of the National Association of Insurance Commissioners, said that state insurance regulators have begun to investigate hundreds of insurers. She also said that the NAIC has begun to draft model legislation that would require disclosure of commission arrangements, as well as establish a hotline to accept anonymous reports on potential fraud (Mason, Philadelphia Inquirer, 10/27). California Insurance Commissioner John Garamendi (D), who has hired a private law firm to investigate a potential lawsuit against the insurance industry, last week announced new regulations that would require insurance agents and brokers to reveal all financial incentives received from insurers and to find the best available policies for clients. California regulators might file suit against as many as six insurance brokers nationwide and as many as 12 insurers. Garamendi also said that he might propose legislation that would ban contingent commissions paid by insurers to insurance brokers (Kaiser Daily Health Policy Report, 10/21).

Anthem Subpoenaed by Connecticut
In related news, Connecticut Attorney General Richard Blumenthal (D) has expanded his investigation into the insurance industry with a subpoena to Indiana-based Anthem, according to Dow Jones/Indianapolis Star. Anthem spokesperson James Kappel said that the subpoena "just lays out some standard questions about commission and bonus structure," adding, "We plan to comply with the request for information" (Dow Jones/Indianapolis Star, 10/27). Blumenthal, who has focused on the business practices of health and automobile insurers, launched his investigation in June (Kaiser Daily Health Policy Report, 10/21). Blumenthal to date has sent subpoenas to at least 35 insurance brokers and carriers for information on all agreements that involve contingent commissions and cases in which they sought or submitted "a sham bid, cover bid, losing bid" that likely "would not be accepted or would be used to feign the appearance of competition." Cigna also has received a subpoena from Blumenthal, and Aetna and MetLife likely will receive subpoenas, according to the Hartford Courant. Blumenthal said, "We will investigate vigorously and follow the evidence wherever it leads," adding, "We've ruled out no companies or areas of inquiry because the overriding goal is to protect consumers and competition" (Levick/Lender, Hartford Courant, 10/27).

Universal Life Resources Lawsuit
Insurance carriers involved in a private civil racketeering lawsuit filed by law firm Lerach Coughlin Stoia Geller Rudman & Robbins against San Diego-based insurance broker Universal Life Resources have denied wrongdoing in the case, USA Today reports (Blair Smith, USA Today, 10/27). The lawsuit, filed earlier this month, alleges that ULR failed to act in the best interests of clients and did not disclose all additional fees and compensation received from insurers, such as contingent commissions (Kaiser Daily Health Policy Report, 10/21). Lerach filed the lawsuit on behalf of an Arizona-based employee of Intel. Alleged "partners" of URL -- which are not named as co-defendants in the lawsuit -- include Aetna, Cigna, MetLife, UnumProvident and Prudential Financial, USA Today reports. ULR President Doug Cox said that the company "categorically denies" the allegations in the lawsuit. Cigna Vice President Wendell Potter said, "We do not believe there is a factual basis for any claims that we violated the law." MetLife spokesperson John Calagna said that the company "plans to vigorously defend itself against this action" (Blair Smith, USA Today, 10/27).